Osborne wants £38bn 'bad bank' within RBS

George Osborne today backed the creation of a £38 billion “bad bank” within a bank at ailing Royal Bank of Scotland, as it was hit with bad news.

Shares in the 81 per cent state-owned institution fell 13.5p this morning to 354p after a string of announcements over its future.

The Chancellor said a shake-up of the bank, including a faster run-down of its toxic assets, would ensure RBS was “batting for Britain” but he admitted it was unlikely to be re-privatised before the 2015 general election.

However, Mr Osborne did confirm that millions of people will be able to buy a stake in the partially state-owned Lloyds Banking Group when a second tranche is re-privatised next year — which could spark another Royal Mail-style share buying bonanza.

New RBS chief executive Ross McEwan today sought to make a break from years of crisis at RBS. He announced the creation of the “bad bank” within the bank — rather than splitting it up into a “good bank” and a “bad bank” with problem loans.

The Parliamentary Commission on Banking had called for the Government to consider breaking up RBS. However, Mr McEwan pledged to deliver a better service to millions of customers.

“Today is a very defining day for our organisation. Let’s focus on the good part of this bank,” he told BBC radio. “We are owned by the UK taxpayer and we need to do a better job.”

But the bank faced more unsettling news today with:

Losses of £634 million in its third-quarter results.

Two traders suspended as part of a global probe by regulators into suspected manipulation of foreign currency markets.

An independent review found it had failed to support small businesses in a way that met its own targets and the expectations of customers.

An additional £250 million being put aside to cover mis-selling of payment protection insurance.

Mr Osborne said today that he thought it was “unlikely” RBS could be sold off and returned to the private sector before the next general election is held in May 2015.

Adding that RBS would withdraw from the US as part of its strategy, he said: “This is a bank that is going to be batting for Britain, supporting the British economy, and yes, hopefully and eventually, we will get our money back.”

However, shadow chancellor Ed Balls said banks were still failing to lend properly to businesses.

He added: “The tests for these changes at RBS are whether they see the taxpayer ultimately get its money back and whether they boost business lending and radically transform this bank.”